Equity Bank loses 1 billion tax dispute to KRA

Invoice and bill discounting, temporary overdrafts, cleared checks, letters of credit, bank guarantees, and loan and credit evaluation reviews all fall under the Income Tax Act’s definition of interest, Justice David Majanja concurred with the Kenya Revenue Authority.
The taxman filed an appeal with the High Court after the Tax Appeals Tribunal decided in Equity Bank’s favor in a ruling made in March of last year.
The judge concluded that the tribunal erred in concluding that the fees levied by the lender in relation to the transactions were interest and, as a result, exempt from excise duty by relying on the ITA’s definition of interest.
Instead of using the definition from a different statute, the tribunal “ought to have been guided by the plain and literal interpretation of the term,” Justice Majanja said. The taxman audited Equity Bank’s tax compliance from 2013 to 2016, the court was informed.
The lender did not pay the appropriate amount of tax, according to the KRA’s analysis of the fees, other fees, and commission revenue, and its justification for why some transactions were exempt from excise duty was insufficient.
The KRA ruled that the fees the bank assessed for the loan and credit facilities it provided to customers, including temporary overdrafts, uncleared effects, letters of credit, bank guarantees, and invoice and bill discounting, did not meet the criteria for interest or the return of a loan amount and were therefore subject to excise tax.
The court was also informed that the MOU between the government and DFID did not expressly exempt the Hunger Safety Network Program from taxation, and that the program was instead operated by donor organizations like DFID in coordination with the Kenyan government outside the purview of the Financial Sector Deepening Trust.
As a result, the KRA ruled that the lender must pay Ksh1.16 billion in total, including fines and interest.  Equity Bank challenged the assessment, claiming that there was no excise tax on the fees for the amenities. The lender contends that the fees on loans given to its clients are not interest-based, and that KRA’s demand was unjust, inaccurate, and in violation of generally established interpretational principles.
Concerning the HSNP, Equity said that the agreement between DFID and the government of Kenya acknowledges that the income comes in the form of grants, all of which are transfer incomes that have previously been subject to the taxes system in the nation of origin.
The agreement states that such FSD income shall not be used to pay for taxes or other fiscal obligations imposed by the government, either directly or indirectly, according to the lender.
The judge agreed with Equity Bank about the HSNP scheme, stating that charging excise duty would be going against a Treasury-approved agreement.